Mineral-rich Guinea is scrapping a controversial mining deal after fears it represented bad value for the country's valuable assets, keenly in demand from the likes of Rio Tinto and Brazil's Vale.

The controversy surrounds a $25m (£16m) loan made to the African state in April last year to set up a new national mining company. It was arranged by Walter Hennig, a South African-based businessman who has traded diamonds in Africa.

A fierce debate has raged in recent weeks about whether the terms of the loan entitle Mr Hennig's Palladino vehicle to take a 30 per cent stake in the new company, at what would effectively be a massive discount, in the event of a default. This could potentially be worth billions of pounds because the company has the right to take 15 per cent of every mine in the country free of charge.

Eric Joyce, the Labour MP, is among those who believe the loan could allow Mr Hennig to amass a huge cut-price stake in Guinea's mineral industry. George Soros, the billionaire investor, has called on Guinea to investigate the loan.

"There are legitimate questions concerning this loan that call for examination and accounting." Mr Soros wrote to Mr Joyce yesterday. However, Mr Soros does not agree that Mr Hennig is in line for a 30 per cent stake in the event of a default.

The government last night said it had effectively pulled the deal "because the terms of the loan are no longer favourable from a commercial standpoint."

Palladino has denied a default could result in it scooping up "30 per cent of private or national assets worth billions of dollars."

Palladino has said: "Such repayment cannot legally exceed the value of the debt due under the loan agreement and it can in no way result in the appropriation by our company of 30 per cent of private or national assets worth billions of dollars."